Part G Legal implications of companies in difficulty or in crisis 21: Insolvency and administration 337Chapter Roundup
Liquidation is the dissolution or 'winding up' of a company.
There are three different methods of liquidation: compulsory, members' voluntary and creditors'
voluntary. Compulsory liquidation and creditors' voluntary liquidation are proceedings for insolvent
companies, and members' voluntary liquidation is for solvent companies.
A liquidator must be an authorised, qualified insolvency practitioner.
Once insolvency procedures have commenced, share trading must cease, the company documents must
state that the company is in liquidation and the directors' power to manage ceases.
A winding up is voluntary where the decision to wind up is taken by the company members, although if
the company is insolvent, the creditors will be heavily involved in the proceedings.
In order to be a members' winding up, the directors must make a declaration of solvency. It is a criminal
offence to make a declaration of solvency without reasonable grounds.
When there is no declaration of solvency there is a creditors' voluntary winding up.
There are seven statutory reasons for the compulsory liquidation of a company, which can all be found in
Section 122 of the Insolvency Act 1986.
A creditor may apply to the court to wind up the company if the company is unable to pay its debts. There
are statutory tests to prove that a company is unable to pay its debts.
A dissatisfied member may get the court to wind the company up on the just and equitable ground.
The differences between compulsory and voluntary liquidation are associated with timing, the role of the
official receiver, stay of legal proceedings and the dismissal of employees.
An administrator is appointed primarily to try to rescue the company as a going concern. A company may
go into administration to carry out an established plan to save the company.
Some parties – secured creditors and directors and the members by resolution – can appoint an
administrator without a court order.
Various parties can apply for administration through the court.
The effects of administration depend on whether it is effected by the court or by a floating chargeholder,
to some degree.
The administrator has fiduciary duties to the company as its agent, plus some legal duties.
The administrator must either propose a rescue plan, or state that the company cannot be rescued.
The administrator takes on the powers of the directors.
Administration can last up to 12 months.
Administration has many advantages for the company, the members and the creditors.